Pak Suzuki Posts 55% Decline in 9 Month Net Profit

Pak Suzuki Motor Company (PSMC) reported its results for the third quarter of the current year (Q3-2018). The company’s profit after tax has declined by 55% for the first nine months of financial year 2018.

PSMC declared earnings of Rs 1,392 million (Earning per Share (EPS): PKR 16.92), down by 55% YoY. On a quarterly basis, the company posted a profit after tax of Rs 95 million (EPS: PKR 1.15) during Q3-2018, which is down by 76% QoQ and 91% YoY.

The lower-than-expected earnings were due to the margin compression and also because taxation remained higher than anticipated. Effective tax rate clocked in at 79% due to the applicability of turnover tax as opposed to tax on profits.

Despite 10% yearly decline in volumes during the quarter, net sales of the company rose by 3% YoY owing to four price hikes in 2018. Furthermore, the company’s cost of sales rose by 7% YoY leading to significant gross margin abrasion. The gross profit fell by 34% YoY, dragging gross margin down to 6.3% YoY.

Drop in the margins was a result of rupee depreciation (PKR down by 18% from Dec 2017 to Sep 2018) as well as higher cost of raw materials (average steel prices up by 5% YoY). Administrative expenses also rose by 67%, which was due to increments in salaries and wages.

Moreover, other income also declined by 59% YoY as interest income from investments declined owing to a reduction in bank balances & advances from customers that were used to earn interest income.

For the first nine months of 2018, PSMC’s earnings fell by 55% YoY, an overall 48% increase in administrative expenses as well as an effective tax rate of 44% compared to 31% in the same period last year.

According to the experts, key risks for the company include further unfavorable movement in the exchange rate and commodity prices, regulatory changes, increased competition from existing and new players and disruptions in operations of the principal company.

The forthcoming time doesn’t look virtuous for the company, as the Pak Rupee drop against the US Dollar in October 2018. While the other two automakers (Toyota & Honda) have increased their prices, PSMC is yet to announce its price revisions. However if they do so, volumes could face an even more significant setback.